Economists await GDP data but say further rate cuts will be needed
Canadian consumers headed to the shops in July with cars among the items on their lists.
Retail sales were up 0.9% to $66.4 billion, smashing consensus estimates and Statistics Canada’s flash estimate of 0.6%. August’s advance estimate is 0.5%. There was a 1% rise in volume terms month-over-month.
A recent poll of small businesses shows weakening sentiment related to future sales.
Motor vehicle and parts dealers saw a 2.2% increase in July, while sales at gasoline stations and fuel vendors were down 0.6%.
Core retail sales were led by food and beverage retailers, and general merchandise retailers (both up 0.8%). Building material and garden equipment and supplies dealers saw the largest decrease in sales at -1.4%.
While the gain in overall retail sales have been welcomed, leading Canadian economists have expressed concern about the broader weakness in the economy, with a softening labour market and concern that GDP may fall short.
RBC economists Nathan Janzen and Abbey Xu expect that Friday’s GDP report may show a 0.1% increase in July.
“The increase we expect in July is still historically soft and would leave output tracking another per-capita GDP decline in Q3—marking the eighth out of the last nine quarters,” they wrote in a client note.
The economist’s expectations of 1% annualized growth in third quarter GDP would be well below the BoC’s July forecast for a 2.8% increase and will necessitate the central bank making further interest rates cuts of 25 basis points or potentially 50 basis points if required by the data.
Desjardin’s principal economist Florence Jean-Jacobs concurred with the estimate of an annualized 1% increase but is more confident of a 50 basis point cut in October, in line with the Fed’s initial cut last week.
CIBC’s Katherine Judge also expects further rate cuts at the remaining 2024 BoC meetings and into 2025, as the stronger-than-expected retail sales for July follows “a string of lacklustre readings in the first half of the year, and the sharp rise in the unemployment rate suggests that pace won't be sustained, especially as mortgage renewals continue at higher interest rates versus five years ago.”
National Bank of Canada’s Kyle Dahms calls the retail sales disappointing for the year as a whole and notes that “monetary policy remains restrictive, and the labor market is slowing, which should continue to limit consumption growth in the months ahead.”
